Commentary on Political Economy

Friday, 14 October 2011

The Minsky Moment: How Paul Krugman Fell Into His Own Liquidity Trap

This paper by Krugman and Eggertsson (both of Princeton University - though the latter currently at the NY Fed) offers a clear illustration of what we have been arguing here is the utter and complete stupidity of even the most enlightened bourgeois economists. We have already examined Eggertsson's "Paradox of Toil" (search this site), so we will not trouble with that particular specimen of exemplary idiocy.

Just take a look at this, friends, and tell us if Paul Krugman is not the greatest imbecile south of the Hudson River!

Krugman (and Eggertsson, who is the junior clown in this comedy sketch) starts with a "general equilibrium model" (which we will call "the Muddle") in which in an economy at equilibrium there are two kinds of producers, "the impatient" and "the patient" producers. Now, anyone will tell you that what Krugman means is that "the impatient producer" is really "the greedier" capitalist who wants to make more "profits" by "borrowing" social resources (it should be "money", but Krugman is still fumbling with "natural interest rates"!! So this is a barter economy after all!) from the "patient" capitalist, who is either less greedy or less a speculator than the "impatient" one. Here is Krugman:

1.Debt and interest in an endowment economy Imagine a pure endowment economy in which no aggregate saving or investment is possible, but in which individuals can lend to or borrow from each other. Suppose, also, that while individuals all receive the same endowments, they differ in their rates of time preference. In that case, "impatient" individuals will borrow from "patient" individuals. We will assume, however, that there is a limit on the amount of debt any individual can run up. Implicitly, we think of this limit as being the result of some kind of incentive constraint; however, for the purposes of this paper we take the debt limit as exogenous.
Note how Krugman substitutes "individual" for "capitalist" - this tendency is precisely what we have been exposing in our series on "Origins of Bourgeois Individualism". So in other words for Krugman the "motive" for capitalist investment is not the political need of capitalists to retain and expand command over the living labour of workers - that is, to accumulate capital - but rather a simple matter of "difference in patience"! Well done, Paul! I always thought you were a great friend of workers!

The second thing to notice (most important) is that Krugman takes "the debt limit" for the "impatient capitalist" as "exogenous". In other words, Krugman cannot see a "limit" to the amount of debt that "impatient" capitalists can "borrow" from the "patient" ones - for the simple reason that his "economy" is an unreal one in which "debt" is quite simply a "quantity" that can expand indefinitely and infinitely on a nominal basis depending on the "patience" of individual capitalists! If indeed "debt" is only a matter of more or less "patience", then (just as with Keynes's "animal spirits") there is indeed no "limit" (political or material) to the amount of "debt" that capitalists can "lend " or "borrow" to one another!!

And that is why Krugman simply "must" make "the debt limit...exogenous" because his general equilibrium economy is one that is built on psychology and not on the real needs of real workers and capitalists confronting one another over the use of social resources!

Now, because the debt limit is "exogenous" - because "debt" for Krugman is merely a psychological matter as vapid and imaginary as Keynes's "animal spirits" - it follows that this "debt leveraging" could proceed forever ad infinitum were it not for....(you guessed it!) an equally exogenous "deleveraging shock"!!! A "Minsky Moment" in which both the lender ("patient capitalist") and the borrower ("impatient capitalist") finally realise that theirs is sheer "speculation" and that the "profits" they anticipated from production are not going to materialise because there is only so much that you can squeeze out of living labour and then turn into more political command (what we call "value")!! Here is Krugman again!

2. The effects of a deleveraging shock We have not tried to model the sources of the debt limit, nor will we try to in this paper. Clearly, however, we should think of this limit as a proxy for general views about what level of leverage on the part of borrowers is "safe", posing an acceptable risk either of unintentional default or of creating some kind of moral hazard. The central idea of debt-centered accounts of economic instability, however, is that views about safe levels of leverage are subject to change over time. An extended period of steady economic growth and/or rising asset prices will encourage relaxed attitudes toward leverage. But at some point this attitude is likely to change, perhaps abruptly – an event known variously as the Wile E. Coyote moment or the Minksy moment.2 In our model, we can represent a Minsky moment as a fall in the debt limit from Dhigh to some lower level Dlow, which we can think of as corresponding to a sudden realization that assets were overvalued and that peoples’ collateral constraints were too lax. In our flexible-price economy, this downward revision of the debt limit will lead to a temporary fall in the real interest rate, which corresponds to the natural rate of interest in the more general economy we’ll consider shortly.
But rather than a "Minsky Moment", Krugman is having a "dumb episode" because nowhere does he explain why our dear capitalists should have...."a sudden realisation that assets were overvalued"!!!!!

A sudden realisation!!! HHHeeellloooo Paul! You are a patented MORON! No! YOU are the "Wile E. Coyote" in this caricature of intellectual rigor that you have engaged in here!! Of course, Krugman, like the perfect bourgeois economist he is, has not even realised that he has fallen into the most abysmal trap or bottomless canyon (like Wile E. Coyote) simply by admitting that the mysterious "sudden realisation" is based on the "fact" that "assets were OVER-VALUED"!!

But Paul, WHAT DOES "OVER-VALUED" MEAN?? It means that the whole business of "borrowing" and "lending" has NOTHING to do with "patience and impatience" and EVERYTHING to do with VALUE, with PROFIT!! Bur value and profit represent precisely the "command" of capital over living labour - which is what you wish to avoid talking about!!

OK. Friends. I will not take this any further. I will just go outside and VOMIT from the bile that has been surging inside me! I will return later with other pieces, once I have calmed down! Ciao.